There is a growing appetite amongst businesses and consumers alike for greater access for account-to-account (A2A) payments, but how mainstream is this interest and what needs to be established before Open Banking-powered payments can be truly realised?
Huw Davies, CEO and Co-Founder of Ozone API, writes for Payment Expert on why A2A payments needs to be commercialised before adoption can become more widespread, the relevant use cases to their benefits in regions like Brazil, and the regulatory boundaries that need to be broken down before they can be introduced to consumers.
The value of account-to-account (A2A) payments is soaring as more markets invest in Real-Time Payments Infrastructure and initiatives such as Open Banking.
A recent study from Juniper Research found the global value of A2A transactions will rise from $1.7trn in 2024 to $5.7trn by 2029, an increase of 230%. These direct bank-to-bank transfers bypass traditional intermediaries like credit card networks and can enable a wide range of use cases such as paying a bill, sending money to a friend, paying for subscriptions or even payment at point-of-sale.
There is clearly rising popularity for A2A payments among consumers and businesses who can benefit from lower fees and immediate settlement. Despite this, they have not yet reached critical mass in many markets.
If we look at the UK and Europe, Open Banking payments haven’t yet reached their full potential. The technology is there, but without an effective commercial model, banks don’t have a strong enough incentive to invest in premium APIs that bring additional value, such as by enabling variable recurring payments.
Fintechs know the commercialisation of A2A payments is needed for the technology to reach its potential; but who is leading this and could we end up with multiple commercial schemes that create an opportunity to drive new payment revenues?
With new legislation including Verification Of Payee on the horizon, banks need to ensure their API platforms can support the required functionality in order to take advantage. Now, collaboration across banks, regulators, and fintechs is more critical than ever.
The global landscape
In markets like India and Brazil, real-time payments with digital payment initiation have been driven as national digital infrastructure. A force for good to create an alternative to cash, drive financial inclusion and act as a catalyst for economic growth.
The UPI payment volumes in India have grown at a staggering rate with over 18 billion payments per month. In Brazil, the industry and government have combined Open Banking with the implementation of PIX, which has transformed the payments landscape in a way that we’ve not seen yet in the UK and Europe.
However, this significant investment in national digital infrastructure has been driven without a clear revenue model for the banks.
In Latin America, Brazil has been leading the way, but there are movements across the region and we’re seeing quite a few markets work out what their journey looks like. Colombia is now also accelerating along this path with the implementation of Bre-B as an example, and we’re seeing more markets in the region becoming more vocal.
A lot of the smaller markets are also now recognising that Open Banking done well is an opportunity to really drive investment into a market, in turn, creating jobs and increasing financial inclusion.
There is a clear recognition though that for most markets there needs to be a clear, sustainable economic model for A2A payments to really unlock scale. This is particularly the case in markets with high levels of financial inclusion or adoption of wallets and those markets with high levels of credit card usage.
The immediate challenges ahead in the UK and Europe
Looking at the UK and Europe now, faster payments combined with payment initiation exists, but the challenge is what comes next to really unlock the scale and potential of A2A payments.
Many banks feel they have already invested significantly, particularly in the UK, where the CMA9 funded the delivery of Open Banking. They are crying out for commercial incentives and whilst variable recurring payments (for commercial use cases) offer that, it is hard to scale if each bank must form a bilateral agreement with every third party who wants to initiate payments. A solution at an industry level is required, a multilateral framework or scheme which defines the commercial model, the liability framework and the operating rules.
The question is who will get there first and will there be one or many? In the UK the domestic industry has been working on this for some time, but it has been very slow. At the same time, Visa has been defining a model and framework that they are starting to roll out which would fill many of the gaps. This of course is also an industry led approach designed to be more than just a domestic answer. And with payments, a model that only works in one market will always have its limitations.
The clock is ticking, and the pressure is on to make this happen and unlock the huge opportunity. While the Financial Conduct Authority may not step in to define the industry-led framework, they can certainly provide support to the industry to help get there quicker.
Which route gets there first is the question, but whoever solves how to provide a clear commercial framework, it is the key to unlock the true potential.
An alternative future is that there are a few commercial frameworks, schemes or overlays, each competing for scale and relevance. Whilst that may not be sustainable in the long term, it is perhaps the most likely scenario in the short term.
